Weighing the Best Vehicles For Philanthropic Giving

KEN NOPAR, who advises others about philanthropy, will face his own decision on charitable giving when his parents die. Should he and his brother keep their parents’ private foundation going or transfer the assets into a donor-advised fund, where they have less control over how the money is invested and given away?

This is a question many philanthropically inclined people are asking themselves in the aftermath of the financial crisis and increased Internal Revenue Service scrutiny of private foundations.

Betsy Brill, president of Strategic Philanthropy, an advisory firm in Chicago, said the number of new private foundations had decreased over the last few years. One obvious reason is the downturn in the economy, which has meant fewer instances like the lucrative sale of a private company or a big stock position. Those events often persuade people to put money into a foundation.

But existing foundations have experienced such a decline in the value of their assets that it sometimes does not make sense to keep them running, she said. In that case, the trustees may opt to convert the foundations to a donor-advised fund, which are less expensive to run but have more limitations.

Mr. Nopar, who works at Strategic Philanthropy, said he might have to wrestle with that prospect in the future. He said the biggest question was what his parents, who are in their 80s, want him and his brother to do. “I’ve gotten involved in the last few years, but before that it was really my parents’ decision,” he said.

While the foundation has been around for 20 years, he stressed that it was not large. It has been a way for his parents to make modest grants to many charities.

Mr. Nopar’s choices are exactly what anyone thinking about creating a vehicle for charitable giving should consider. After all, how you help favored causes could be as much a part of your legacy as which groups you support.

CONTROL Having a say over where your money goes and how it is distributed is important to many people.

A private foundation gives much more control than a donor-advised fund. With a fund, the donor is technically only making recommendations to a firm managing and distributing the money. (Fidelity, Schwab and Vanguard have large donor-advised fund businesses.)

Practically speaking, a donor’s suggestions are usually not ignored. But one important thing you cannot do with a fund is make pledge agreements to, say, your alma mater, said Drew McMorrow, senior client adviser at Ballentine Partners, a wealth manager.

“You can’t do that in a binding way from a donor-advised fund because you’re not technically controlling that fund,” he said.

Control often goes beyond where grants are made. There is also the question of how the assets are invested, which you can control only in a foundation.

“A lot of people who create these foundations have made their money through investing,” said Joanne E. Johnson, managing director of the wealth advisory practice at J. P. Morgan Private Bank. “They have some acumen on the investing side, and they don’t want to be relegated to an asset allocation that is a series of mutual funds.”

Of course, even with a foundation, the level of control is never unfettered. “The I.R.S. doesn’t want you to use these things as piggy banks,” said John Dadakis, a partner at the law firm Holland & Knight. “One needs to be very careful in administering a private foundation.”

A classic example is using a private foundation to buy tickets to a gala and then giving those tickets away to friends. People need to be aware that self-dealing is not allowed.

Photo

Joanne E. Johnson, managing director of the wealth advisory practice at J.P. Morgan Private Bank.Credit
Ruth Fremson/The New York Times

COSTS From a pragmatic point of view, advisers agree that size matters when determining which type of philanthropic vehicle to establish, since private foundations cost more to maintain.

There are no hard and fast rules to determine when a foundation is more cost-effective. Ms. Johnson said you need at least $1 million, while Mr. Dadakis said he recommended a minimum of $10 million.

There are several reasons for this. For one, a private foundation needs to give away at least 5 percent of its assets each year; a donor-advised fund does not. And a foundation also needs to earn enough on its investments to cover administrative costs, which, Ms. Johnson said, could total up to 8 percent a year.

Another big issue is the size of the tax deduction. It is much higher for a donor-advised fund, with a 50 percent tax write-off for cash donations and a 30 percent one for securities. This is because these funds are considered public charities. For a private foundation, the deduction is 30 percent for cash and 20 percent for securities.

“The donor-advised fund makes it a lot easier for administration and it takes the burden off of the family to keep minutes and file” the required I.R.S. forms, Mr. Dadakis said.

PRIVACY Many documents about foundations are readily available on the Internet. GuideStar, a database on nonprofit groups, publishes I.R.S. filings, annual reports and even the private foundation’s board members. Anyone can also search certain criteria, such as where a nonprofit group has given money.

Beyond a criminal using your personal information for nefarious reasons, charities can take this information and put you in an awkward position. “I had a client who enrolled his child in a preschool and within a month of enrolling their child, the development director had approached them to make a grant of $100,000,” Mr. McMorrow said.

The client was taken aback, Mr. McMorrow said, because the size of the gift was consistent with what he had given to schools his other children had attended. The client had not realized how easy it was to get the information online.

“They ultimately consented to a gift that was lower and structured over a few years,” Mr. McMorrow said. “They didn’t feel they could say no.”

In this case, the school was savvier than the donor, but no one wants to be put in a position of being pressured, even if it is for charity.

A simple solution for those setting up a private foundation is to avoid naming it after themselves and then have all inquiries sent to a lawyer or adviser.

Privacy concerns could also be a reason to consider a donor-advised fund. It would still be possible to see the amount of money that went into the fund, but not possible to see how that money was distributed.

LEGACY Of course, there are reasons that go well beyond charitable giving that factor into the decision to create a foundation or to use a donor-advised fund or other charitable vehicle. Status is the obvious one, but legacy is another.

Ms. Brill said people needed to ask how long they wanted their giving to go on. Some want to give their money away before they die. Charles Feeney, who made his fortune as a founder of duty-free shops, is a case in point.

Other people may want a foundation to live long after them, allowing descendants to remain in control. “With a private foundation, there is unlimited succession for control of the foundation,” Ms. Johnson said. “Some donor-advised funds have limitations on successions, and once that is reached, the fund goes into a general pool at that organization.”

And while charities will still benefit, they will not know the story of the person who made that money.

Correction: February 12, 2011

The Wealth Matters column on Jan. 29, about the comparative advantages of private foundations and donor-advised funds for charitable giving, referred incorrectly to the tax benefits of the two approaches. The tax deductions are limited to a percentage of the donor’s annual income; they are not determined as a percentage per gift.

A version of this article appears in print on January 29, 2011, on Page B6 of the New York edition with the headline: Weighing the Best Vehicles For Philanthropic Giving. Order Reprints|Today's Paper|Subscribe